An Introduction To Hyperinflation

Imagine taking a road trip. At the start of the day, a can of soda at a convenience store costs exactly $1. By nightfall, that same can of soda costs $3. This sounds impossible, right? (Curious about inflation? Check out What You Should Know About Inflation.)TUTORIAL: Inflation

Well, for some people who have been unfortunate enough to live in the wrong place during the wrong time in history, it isn't. Almost everyone has witnessed the consequences of inflation, or what happens when prices on goods and services increase over time. But few people have had to endure hyperinflation, a term used to describe price increases that occur at a dramatically quick rate.

Defining HyperinflationWhile there is no exact definition of that rate, most economists say that hyperinflation has occurred when the monthly inflation rate exceeds 50%, or if prices on goods increase by half in just one month's time.

As you can imagine, cases of hyperinflation do grave financial harm to a nation. Life savings can be erased in a matter of days. Money can become essentially worthless, giving no one any incentive to work. And, if it happens for long enough, hyperinflation can cause people to revolt against their governments, fight among each other or, in some cases, go to war with a neighbor.

The German HyperinflationThe most infamous case of hyperinflation came in Germany in the early 1920s. Just a decade before, Germany was one of the participants in the ruinous First World War. In order to finance its war efforts, Germany went into debt by issuing bonds and rolling out more currency via the printing press. Germany planned on having its surrendered enemies pay the debts off after the victory. (To read about how Germany recovered after World War II, see The German Economic Miracle.)

Military Surrender, Economic RuinHowever, the opposite happened; after its surrender, Germany was forced to sign the Treaty of Versailles. The treaty meant that Germany had to pay reparations to the Allies and also saw large swaths of its territory divided up. By punishing Germany in such a fashion, proponents argued that it would prevent it from ever launching another military attack. But the treaty did have its share of critics; influential economist John Maynard Keynes, who represented Britain's treasury, resigned from the conference that dictated the treaty's terms. Keynes warned that the treaty would hurt Germany too much and lead to yet another world war. (Learn more about Keynes in the Giants Of Finance: John Maynard Keynes.)

From Bad to WorseAt the end of the war, the German mark had fallen by 50% against the U.S. dollar. Germany's deficit was enormous for the era, about half of England's GDP, thus further devaluing the mark. Making matters worse, in the winter of 1922 and 1923, Germany was forced to default on its reparation payments. In response to this, France and Belgium took control of the Ruhr, Germany's industrial powerhouse.

German workers, at the encouragement of the government, went on strike in response. In order to support those who walked out, the government simply printed more money. And this pushed the economy over the brink.

Wheelbarrows of MoneyPrices on goods immediately skyrocketed; unemployment soon followed. The stories of the rampant hyperinflation seem almost unimaginable: the price of cup of coffee would more than double by the time a meal was over; workers were paid daily in order to purchase any goods while they still could; infamous pictures of men using wheelbarrows to literally carry their money soon circulated. Eventually, the German treasury issued a 1 billion mark note, which soon lost any value it had. Cities and states created their own currencies in order to circumvent the mark – the mark had essentially lost all of its value. (For related reading, check out Coping With Inflation Risk.)

Keynes' Dire Warning Proved RightPrices did not stabilize until Hjalmar Schacht, the president of Germany's central bank, came up with the idea to introduce a new currency. It would be backed by the value of the nation's many assets and called the Rentenmark. But the damage had been done; millions lost their life savings and confidence in the nation's governors was depleted. In 1923, the Nazi party attempted a failed coup. But in the next election, they, along with other extremist parties, gained a foothold in the German legislature. And an imprisoned Adolf Hitler started to write "Mein Kampf," which largely blamed Jews and others for the tragedies of hyperinflation.

It wouldn't be too long until Keynes was proved right.

The Hungarian HyperinflationUnfortunately, Germany hasn't been the only country impacted by hyperinflation. After World War II, Hungary suffered perhaps the all-time worst cases of an out-of-control currency; during a 12-month period between 1945 and 1946, prices rose by 19% per day on average. In July, at the tail end of this ordeal, prices in Hungary tripled every single day.

Recurring Hyperinflation in ArgentinaBut hyperinflation isn't just a relic of the past. Argentina, for instance, has battled periodic hyperinflation throughout the past 30 years; prices rose by 1,000% from 1975 to 1983 and, at the end of the '80s, rose by 200% per month. After Argentina defaulted on its debt in the early 2000s, inflation once again hit irrational heights. (Learn about evaluating these kinds of default risks in Evaluating Country Risk For International Investing.)

Hyperinflation in YugoslaviaThe former Yugoslavia, right as it was about to break up into several other countries, endured one of the worst recorded cases of hyperinflation the world has ever seen. According to some experts, it started in 1991, when former president Slobodan Milosevic ordered the central bank to offer over $1 billion worth of credit to his political allies. This was approximately half of the currency that was planned to be created that year. That set off a money printing spree, which quickly led to prices escalating out of control. Food supplies and gasoline were nowhere to be found. In January of 1994, the monthly inflation rate was 313,000,000%. People stood in long lines in secret markets in order to exchange bundles of the Yugoslav dinar for one lone dollar.

Hyperinflation for the New CenturyHyperinflation once again reappeared in the headlines this past decade, this time in the African nation of Zimbabwe, where it has been estimated that, at its peak, prices on goods doubled once every 24 hours. In 2008, 50 billion Zimbabwean dollars would fetch two bars of soap; three days later, that amount would only buy one. In early January of 2009, the government issued a bank note worth 100 trillion Zimbabwean dollars, which at the time was equal to 20 British pounds; at one point in history, the two currencies were roughly equal in value.

Zimbabwe's government was receiving much of its money from a German-based printer; however, the printer eventually stopped doing printing Zimbabwe's money in response to international pressure that was intended to force drastic change in the government's regime. Almost none of the nation's citizenry believed the currency to have any value and usually traded in American dollars, a crime which could result in prison time. Eventually, the government completely abandoned its own dollar and let in foreign currencies, a move which, when enacted in March 2009, finally brought some level of sanity to the beleaguered nation.

Bottom LineHyperinflation isn't some historical curiosity. It is a very real risk that countries and governments still struggle with today. The next time you complain about picking up the check at a restaurant, count your blessings. There have been plenty of times in history where the price at the end of a meal was nearly double what it was at the start. (For more, check out Curbing The Effects of Inflation.)